RICS Americas Property World Fall 2009

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An information resource for RICS members around the globe.

An information resource for RICS members around the globe.

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  • 1. 2009 | FALL EDITION | RICSAMERICAS.ORG PROPERTY AN INFORMATION RESOURCE FOR RICS MEMBERS AROUND THE GLOBE ARE WE THERE YET? COMMERCIAL REAL ESTATE’S LONG ROAD TO RECOVERY. MEXICO IN TIME OF CRISIS CANADA’S REAL ESTATE MARKETS TOWN PLANNING IN ITALY RICS-PWFall09.indd 1 11/5/09 2:43 PM
  • 2. Contents Contacts Publishing and advertising managed by: RICS Americas propertyworld@rics.org 5 Are We There Yet? Editorial Board: Marc Louargand, FRICS Tony Grant, FRICS Simon Taylor, FRICS Matt Bruck, RICS Americas Managing Director 9 Toward Sustainable Finance: Readers: James Arrow, MRICS The Trouble with Asset Values Don Dorchester, FRICS Dennis Webb, FRICS Maureen Ehrenberg, FRICS Alistair Lamb, MRICS Clive Lowe, FRICS M. Barden Prisant, FRICS 12 Site Specific Art: Where Real Estate Executive Editor: Steve Wolfe, RICS Americas and the Art World Intersect Director of Operations Beverly Schreiber Jacoby, FRICS Managing Editor: Will Safer, RICS Americas Communications Associate Designed by: 15 Ten Principles for Sustainable Aaron Mickelson Printed by: Property Underwriting & Valuation Earth Enterprise Scott Muldavin, FRICS Published by: RICS Americas 60 East 42nd Street Suite 2918 19 Canada’s Real Estate Markets New York, NY 10165 T +1 212 847 7400 Sheila Botting, FRICS www.ricsamericas.org 22 Mexico in Time of Crisis Oscar J. Franck Terrazas, MRICS 25 The Challenge of Real Estate Investment In Italy Marzia Morena, MRICS While every reasonable effort has been made to ensure the accuracy of all content in the journal, RICS will have no 27 The Value of Continuous responsibility for any errors or omissions in the content. The views expressed in the journal are not necessarily those of RICS. Program Assessment RICS cannot accept any liability for any Alexia Nalewaik, MRICS loss or damage suffered by any person as a result of the content and the opinions expressed in the journal, or by any person acting or refraining to act as a result of the material included in the journal. 29 Concern in the Caribbean: All rights in the journal, including copyright, content and design, Strategies for Surviving are owned by RICS, except where otherwise described. the Economic Crisis Steve Rajpatty, MRICS front cover © Katja Wickert RICS members receive RICS Property World | Fall 2009 3 50% off job listings RICS-PWFall09.indd 2-3 11/5/09 2:43 PM
  • 3. Enter the World Economic Overview of Caribbean Construction Are We There Yet? Marc Louargand, FRICS, cautions that even while the rest of the economy appears to CCD is the must-have trade journal for be recovering, the commercial real estate market will likely lag behind. the global construction professional Caribbean Construction Digest (CCD) is a new trade journal geared towards “redefining the built environment” within the Caribbean. CCD provides news, information, discussions and debates on issues impacting on the Caribbean’s unique construction industry, as well as articles and interviews on people, © Yanik Chauvin programs and projects of importance to various stakeholders. CCD is a reliable source of Caribbean construction highlights for the academic, A s we exit the middle of 2009 we are still countries are expected to have positive growth contending with a global recession that has although at lower rates than in past years. professional, investor and contractor. had a negative impact on property markets. The outlook for the near term is not better. Given In the United States, the signs are still mixed but the lagging nature of property market responses many economists are calling for a positive GDP change in the third or fourth quarter of 2009. Articles by respected professionals to the broader economy, things will probably get worse before they get better. What will it There are a few positive signs in leading industries. from around the world take for things to turn around? Where are we The Book-to-Bill Ratio in Semiconductors rose going in terms of occupancies, rents and values? to .74 in May compared to .47 in January. The Special reports and technical What forces will combine to shape the fortunes Book-to-Bill ratio compares current sales (Book) information of the property market for the next few years? to shipments (Bill). When the ratio is at or above 1.0 it signifies a healthy electronics market. By The Global Recession comparison, the May 2008 ratio was .86. Things Comprehensive construction are improving but we still have some distance news coverage We are still in a global recession that began to go. By contrast, the Book-to-Bill ratio in at the end of 2007. The World Bank forecast Japan in May was .40. The OECD reports that contemplates negative GDP change in OECD Insight, in-depth data and countries of -4.2 percent with a negative 4.8 leading indicators for most economies pointed industry analysis up or signified a trough in May 2009. The percent in non-OECD countries for the full year current recession has been more severe and 2009. Developing countries, which typically pervasive than the two previous ones. Job loss Commentary, Interviews have relatively high GDP growth rates, are in the United States and elsewhere far exceeds and much more! forecast to come in at only 1.2 percent in the experience of the last two downturns. In 2009. OECD countries are forecast to have a order to understand the reaction of the real modest recovery in 2010 with GDP growth of estate market to the broader economy we 1.2 percent. Some of the world’s more robust need to focus on job loss and job creation. economies have been hit hard. Korea recently Let us be your guide to the raised its GDP forecast from -2 percent to -1.5 Jobs and the Recovery world of Caribbean construction percent. Singapore has released a -4 percent to -6 percent GDP forecast and Brazil is forecast to Readers may recall talk of a “jobless recovery” www.cariconstruction.com be -1.1 percent. Only India and China of the BRIC in the early 2000s. In fact, all recoveries are Redefining the built environment For subscriptions or advertising please call 868 221 9366 or email RICS Property World | Fall 2009 5 sales@cariconstruction.com. RICS-PWFall09.indd 4-5 11/5/09 2:43 PM
  • 4. Economic Overview Economic Overview simultaneously. Based on behavior by recent graduates, it also and dicing the paper into increasingly remote derivative claims. appears that there will be a meaningful pent-up demand for Since the ultimate buyers of those claims were comforted by apartment rentals that can only be unleashed by job creation. agency ratings that implied low risk, it appeared that a miracle had occurred and that risk was banished from the marketplace. The office sector has a modest over-capacity at present. Whether it Today the miracle of the disappearing risk has been debunked as gets worse before it improves will be determined by firms’ ability just another illusion. The expression of risk is found in the spread to retain their current staffing levels and remain viable. In the of required yields over Treasuries or Gilts or other putatively risk- United States, credit markets appear to be turning back toward free instruments. Transaction data from the past two quarters has begun to show a rise in both cap rates and spreads. I expect that we will Cap Rates again have a flat During the recovery from the 2001 recession, which was accompanied by a modest excess supply of real estate due to economic contraction, Real Capital Analytics reports that the bottom for an extended average cap rate for institutional transactions was 8.74 percent during the period January 2001 to December 2005. During the period as we enter a same period the average 10 year Treasury rate was 4.43 percent. The real estate cap rate spread averaged 430.7 basis points during that time. Why were spreads so high? Why was the real estate risk period of mixed results. premium nearly 100 percent of the Treasury yield? In the 1980s real estate cap rates had negative spreads to Treasuries. Why? Because investors assumed that the high inflation rates of the a semblance of normalcy with the exception of the possibility of period would be reflected in increasing revenues and values if they a CIT bankruptcy, which could have a major impact on several persisted. During the recovery from the 1990 recession, which was industries that rely on factoring and franchise finance. Expect the accompanied by market to remain weak for 18 to 24 months. Robust office markets a massive typically require vacancies to fall below 14 percent in the United excess States while several forecasters are estimating that vacancies will Months to Recover Peak Emplyment Bureau of Labor Statistics; Saltash Partners LLC; Establishment Data be approaching 17 percent by year-end. Of course, in individual markets the numbers vary widely with some moving into the mid- Figure 1: Recent Post-Recession Employment Recovery 20s already. But these numbers tend to be in traditional growth markets (with the exception of Detroit) that have shown the capacity to grow jobs at 5 percent to 7 percent per year in recoveries. The U.K. “jobless” as seen in figure 1, Recent Post-Recession Employment they anticipate. Even if so, it will take an extended period to make market looks to be in somewhat better shape in terms of the level of Recovery. It took 48 months to regain peak employment in the progress back toward the peak employment we saw last in 2007. vacancy but the relative importance of financial services in the City United States after the 2001 recession, until February of 2005. The I expect that we will again have a flat bottom for an extended and the West End could make for an extended recovery period. percent of job loss in the current recession has been significantly period as we enter a period of mixed results. Some will be rehiring sharper than it was in the 2001 recession, which bottomed at while others are still cutting. How does that affect real estate? The pieces are in place for a slow recovery in the jobs market, 97.9 percent of peak employment. As of June 2009, the United which means that real estate fundamentals will remain weak States had fallen to 95.3 percent of peak employment. It took There did not appear to be any significant capacity shortages in for an extended period and will embark on a slow recovery four years to replace those jobs in the 2001 recession; it will likely the property markets during the last expansion (with the possible when the job market begins to rise off its bottom. take much longer to recover this time. What does it mean for exception of hedge fund office space in Greenwich, Conn.). Thus, the property recovery will follow the jobs recovery. For now, How have the decline in fundamentals and changes in property markets? Figure 1 shows that the previous employment the office market remains weak in the United States, United the capital markets combined to affect values? The two recoveries follow a trend upward from a trough after “bumping Kingdom and elsewhere with rising vacancies and declining critical variables are risk premia and leverage ratios. along the bottom” for an extended period, about ten months in both cases. This recession is significantly different in both rents. Retail occupancies are suffering as well as retailers go dark Return of Risk the extent and the speed of job loss in the United States. in marginal locations or shut down entirely. Regional and super- regional malls are harder hit than in previous downturns while Risk premia have returned to asset pricing. During the Will the recovery resemble past history or not? Employment smaller shopping centers suffer as well. Given consumers’ new recent bubble, buyers made little distinction between the contraction is far more widespread this time around and that propensity to save in the face of asset deflation and reduced bluest of blue chip properties and those in historically may be something of a silver lining. Traditionally, firms take circumstances, retail will likely take substantial time to come back. volatile and risky markets. Why was that? Some would advantage of a recession to trim costs, remove deadwood and argue that it was because the investor was not bearing delay rehiring in the recovery as long as possible in order to Multi-family properties have seen increased weakness but on any risk. The lenders were taking it all. Yet the lenders’ a relative basis their fundamentals remain better than other © Photon75 restore their balance sheets. Given the sharp reduction in jobs, it rates did not reflect meaningful risk premia either. A is possible that firms will find they have a capacity problem early property types. Multi-family will also enjoy the earliest firming of cynic might note that the originating lenders were on in the recovery and that they must begin rehiring sooner than fundamentals as job creation brings household formation almost not bearing any risk either since they were slicing 6 Find extended articles, charts and more online ricsamericas.org/property-world RICS Property World | Fall 2009 7 RICS-PWFall09.indd 6-7 11/5/09 2:43 PM
  • 5. Economic Overview Sustainability—Finance Toward Sustainable Finance: supply of finished product, cap rates traded between 9 percent Rising Cap Rate Scenario and 10 percent. Why? Because the specter of inflation had been banished by then. Investors priced property to reflect We have already seen a few transactions with markedly higher its inherent risk, returning to a spread roughly equal to the cap rates. They are likely to remain high if not go higher if space The Trouble with Asset Values Treasury rate. From early 1992 to the end of 2000, Treasuries market fundamentals remain weak and inflation remains dormant. traded between 5 percent and 6 percent. During 1998, Treasury Since we are in a balance sheet recession, it’s likely that deflationary rates pulled back into the 4 percent range and cap rates forces will remain at work in the short run. If so, we should expect followed, dipping into the 8 percent range — but bounced some continued decline in values as cap rates adjust upward to a back into the nines when Treasuries returned to the 5 percent new equilibrium in the 8 percent to 10 percent range. Realize that Dennis Webb, FRICS, argues for applying concepts of long-term sustainability to financial processes—essentially range in 1999. The failure of Long Term Capital and the the cap rate adjustment is occurring while fundamentals weaken telling the truth about value—as short-term asset valuation models continue to feed economic turmoil. and leverage declines — or disappears altogether in some sectors or markets. The combination is likely to bring value declines on It could take as many the order of 40 percent or more. Based on the institutional return indices in the United States and the United Kingdom, it appears as five years to regain that value declines on the order of 40 percent are a reasonable expectation and in fact have been booked in the case of publicly traded real estate securities. Coincidentally, a shift from a 6 the jobs lost to date. percent cap rate to 10 percent delivers a 40 percent decline in value for a constant income stream. While transaction volume has remained scant, the implications are clear for value. In the Asian crisis created a flight to the safety of Treasuries and real case of open-ended funds that are required to revalue quarterly, estate benefited as a result. But rates came back up in 1999 and already we see more than 30 percent declines in the past year. remained in the same range until 2002 when the Federal Reserve began its fight against the specter of deflation. Cap rates fell along While fundamentals will continue to weaken for some time, with Treasuries as liquidity flooded the world’s capital markets. The the shift in cap rates will create most of the revaluation. inevitable end to the property pricing bubble has come, evidenced © J Freeman Which will it be? first by a dramatic drop in transaction volume as investors avoided creating a reportable value against portfolios of higher book It likely will be both. Persistent high cap rates for a period of at values. Transactions have begun to come back, perhaps driven least 12 to 24 months, followed by cap rates falling on a relative by foreclosures or liquidations in pursuit of delivering. Recent cap basis to Treasuries. The initial phase of recovery will see few if any S rates have returned to the 9 percent and even the 10 percent level jobs created, thus investors will lack confidence that they will be ustainability as a concept is routinely applied create healthy perceptions of value in a big according to Real Capital Analytics. Where will they go next? able to fill empty space in the short run so they will rely on in-place to the natural world but routinely ignored way. The bad news is that adoption of anything revenue and be subject to reduced leverage opportunities. At some with respect to the financial environment. A that has tried to get in the way of what had There appear to be two possible paths for cap rates and point, however, the massive liquidity created by stimulus packages large portion of the population has developed been a very profitable false reality was wholly pricing in the next two to five years. What could drive them around the world will escape the liquidity trap and inflation will an awareness of conservation principles and resisted by existing institutions. The speed with back down and what could sustain them at elevated rates? come roaring back. Monetary policy response will lead to higher at least some respect for nature but financial which a clearly unstable system has imploded Falling Cap Rate Scenario reference rates from central bank actions or from investor pricing. beliefs are so embedded in our thinking that has been surprising, but so has the extent of we regard them as given, and have allowed global cooperation and the proliferation of A return of expectations for high inflation accompanied by It could take as many as five years to regain the jobs lost to date. institutions to develop based on (what are now new ideas. I am quite optimistic over the long improving fundamentals in space markets could combine to lower But expectations of a recovery will allow investors to look forward obviously) unsustainable premises. The oceans term, since there may now be an opening for cap rates dramatically on a relative basis. Recall that property traded to better cash flows. Investors have shown in previous cycles that are rising slowly but financial consequences are new understanding and a collective interest in at negative spreads to Treasuries during the high inflation years. they are willing to pay a small premium to have their assets in descending upon us at a frightening rate. telling the truth. There is hope for Capitalism II. We had reasonably sound fundamentals in most space markets portfolio when good times return. So after a period of persistently during those years so investors had a reasonable expectation of high cap rates investors will come back into the market in sufficient The root of both aspects of sustainability is Wages of conventional wisdom being able to raise revenues along with inflation. But remember volume to put downward pressure on cap rates and force them to short-term thinking. Our short-term notions of price inflation into their expectations rather than into the cap rate. asset value have fostered unreal perceptions Short-term notions of value have become that the nominal cap rates were low during that period only by of individual wealth and growth, and enabled embedded in our conventional wisdom, to contrast to the very high risk-free rates that failed to completely In each cycle, animal spirits rise to deny its very existence. Perhaps enormous financial distortions. Short-term the point that our collective belief system reflect expected inflation. Will the Treasuries and Exchequers of some memory of the current trauma will remain to inform our thinking creates a historic myopia and a kind regarding asset value has moved into a sort • the world have the discipline to head off incipient inflation from decisions during the coming recovery. of vacuum in which greed can have a field of fanciful parallel universe. This collective massive liquidity infusions? If we see a Japanese-style policy emerge day. Most recently, otherwise stable assets fantasy has fostered unreal perceptions of with long-lived low reference rates, we may see falling cap rates were allowed to enable extremely unstable individual wealth; one unfortunate, immediate again. Another enabler of falling cap rates was enjoyed in the Dr. Marc Louargand, FRICS, CRE derivative securities, with (by now) well-known consequence of which is the pain of foreclosure previous cycle — low interest rates accompanied by high loan- Principal implications for global financial markets. now being experienced by a great many to-value ratios. A 90 percent LTV at 5 percent interest means a 6 Saltash Partners LLC borrowers worldwide. The full measure of its percent cap rate yields 15 percent to the equity. The likelihood of Saltashpartners.com The good news is that we do have institutional consequences is far greater than foreclosures, this arrangement obtaining in the foreseeable future appears dim. marc@saltashpartners.com financial structures that can be adapted to however, as our collective sense of loss has 8 Find extended articles, charts and more online ricsamericas.org/property-world RICS Property World | Fall 2009 9 RICS-PWFall09.indd 8-9 11/5/09 2:43 PM
  • 6. Sustainability—Finance Sustainability—Finance For example: What if a lender had made a single-family mortgage an institutional structure for countering the destabilizing effects of loan in 2005 based on a two-value appraisal? Say short-term frothy property markets. Its methods are an approximation for getting conditions support a current market value of $650,000, but also that at a long-term value, and have apparently worked quite well. MLV is this value demonstrates a divergence from the long-term trendline now included as part of International Valuation Standard 2, but has based on property type and market area, and another value was apparently not been adopted by any other countries or institutions. concluded at $400,000. The lender is now faced with a much more firm underwriting basis than with the $650,000 value alone. There Expanding the role of asset-level valuation are actually two collateral assets, one valued at $400,000 and one Existing risk-management tools are divorced to a large degree at $650,000 — $400,000 = $250,000 (hardly a small difference). from the underlying assets, making broad assumptions about A long-term loan can reasonably rely on the $400,000 value, and growth rates (6-8 percent into perpetuity?!), which have been its expected long-term growth rate. Of course, the growth rate known by valuers to be absurd. The problem is that apparently no could change, and the value could again be subject to short-term one (on Wall Street) thought to ask, confirming that conventional conditions at any future date. Nonetheless, the long-term based wisdom has been driving their myopic risk analyses. Recognition value would present less risk of loss than the short-term (current) of MLV, or some other standard that parses short- and long-term value. The $250,000 difference between the two is clearly a riskier perspectives, would provide a much more secure reliable foundation Year component of current asset value, and could be underwritten as such. for the higher-level tools used by institutional risk analysts. Figure 1: U.S. Inflation-Adjusted Home Prices What about the reverse situation? What is an appropriate price The current MLV standard makes a substantial effort to achieve long- reference when the market is temporarily depressed? What if the term values for income-producing properties, adjusting cap rates, long-term value is $400,000, but the market will only pay $280,000, rent levels etc., but so far appears to be less effective with respect to become enormous. Perceptions that were outrageously optimistic conditions, asset values can indeed be used to underpin long- due to oversupply or any number of other current, short-term single-family and other owner-occupied and non-income-producing have turned depressingly pessimistic, and what might have been term loans and investment, and these observations would argue conditions? The $120,000 below-trend value is also due to short- types. However, valuation technologies have continued to advance experienced as a normal return to a relative stable, long-term trend, for high ratings in their associated credit derivative instruments. term conditions. The lower value is meaningless in the long-term, since the standard was established and they could be brought to is instead being viewed with much hand-wringing and grief. but does reflect an impaired ability to sell now. A recovery to The short term is another story, as short term pricing is highly bear on the issue by the valuation profession. Such an analysis of $400,000 will occur at some point, although its timing is uncertain. Were individuals really richer, or was the experience guaranteed vulnerable to unexpected events. Unsustainable capital market the effect of time on value is currently in use for many property and The market may even fail entirely (as for certain types of bank-held to be fleeting? Did stable assets really become unstable? Were conditions and (local) natural disasters, to name just two, can ownership conditions. Examples include highly developed statistical derivative securities). It’s the ability of the holder to wait that gives the foundations of risk analysis realistic and appropriate? Much cause short-term pricing behavior to diverge considerably from methods (for examining and tracking broad markets), real estate the assets value under these conditions. This is not so different from of the blame for the collapse of the fanciful parallel universe the underlying long-term trend. Is short-term pricing a suitable damages (which demonstrate recovery to normal pricing levels various commonly-observed impairments, attributable to ownership is aimed at the entirely unexpected, widespread/systemic benchmark for long-term decisions? It still may be, so long as any over time), marketability impairments (risk of a forced hold) and (undivided interests held by two or more parties, for example), or nature of the decline in property values. However, a closer deviation from the long-term trend is identified and understood. The other methods. Valuers have the tools to parse between short- and physical impairments (such as toxic contamination). Impairments examination of asset pricing reveals that we have not been outsized risk exposure comes when deviations are not understood; long- term conditions, and deliver value opinions based on these are generally cured over time, with the property trading at less than telling ourselves the truth, and that a decline was inevitable. when short-term “frothy” pricing is used as evidence of market value premises. Of course, developing uniform methods and training its “stabilized” or long-term value during the impairment period. for long-term decisions. The reverse problem arises when prices (of programs will take some doing; but is there really an alternative? What is it with asset prices, anyway? property or derivative paper) are depressed, or when markets fail, It would make sense for valuers to go beyond their current/traditional Conclusions impairing the short-term market value of collateral. In either case, policing function, and parse their opinion into short- and long-term Real Property assets are among the most stable and least volatile the consequences of poorly understood asset values are not trivial. components. It does no good for valuers to bail out of opining The notion of financial stability should, by now, be ready for prime fixed assets over the long term, normally exhibiting a reasonably on such issues, on the basis that they should not be involved in time. The question is… Are we really committed to adopting a consistent historic trend over time. Even at present, a portion of Are valuers actually helpful? underwriting decisions. Valuers are the ones in a position to analyze long-term mindset? If so, someone needs to attend to the long- a property’s value is, indeed, quite stable; its long-term value is and understand what is and is not a stable and reliable value. This is term value trends if we are to a) substantially reduce the effects of reasonable predictable, and not strongly subject to unexpected What happened to the checks built into the property finance not a simple undertaking, to be sure, but an essential step toward unexpected events, b) provide some counterbalance to the positive events. However, another portion is more directly affected by system? One such check involves market-value appraisals. Did establishing popular and institutional awareness of sustainable value. feedback system which encourages both ever-escalating asset short-term (unsustainable) conditions, which can conspire to inflate banks and investors rely on appraisals? If so, did they help, hurt, or deflate value well beyond an expected range, and exposure to or do anything useful at all? Appraisals are generally intended to values on the one hand, and the collective malaise and liquidity The Germans are convinced unexpected events can become great. When this happens on a make sure that the collateral has sufficient value to support the impairments that depress values. If not the valuer (who has been wide scale—when short-term and long-term value components are loan, but the market value premise is only a snapshot in time. The Just such a method for appraising commercial property under generally marginalized into the role of policeman), then who? Who conflated and confused—a bubble or depression can begin to feed appraisal typically considers property, its local environment and conditions approximating the long-term was established in 1996 by really understands the assets? If we want to build a sustainable on itself. A positive feedback loop amplifies the value trend in both capital market conditions with reference to other (comparable) German Pfandbrief mortgage banks for collateral used with highly financial system, we may have less fun when bubbles begin to directions. Property owners experience themselves as unreasonably transactions and current investor (or home buyer) behavior. This rated covered bonds. Under this system, valuers provide opinions soar but will endure far less grief when they come back to earth. rich or poor, and derivative securities that are designed to rely on is largely a policing function, where a neutral party (valuer/ of “Mortgage Lending Value” (MLV), defined as: “The mortgage Continuing our historic myopia will not serve the sustainability property’s fundamental stability can become severely impaired. appraiser) offers an opinion of value that may or may not match value of a property is the value that can be expected with a high level needs that the future demands. I do believe that what will serve the transaction price. But assuming the transaction is consistent of surety, derived from the historic perspective of market events at us long term, as an achievable and maybe even transformational Unexpected events do not typically affect the long-term trend, as suggested by Robert Schiller’s inflation-adjusted home price with others… what if the entire market has been moved by the time of the valuation, on the basis of the durable characteristics, goal, is widespread understanding of the truth about value. • external conditions, such as easy money, lax lending standards, and and which will be achieved in normal property transactions over a index, shown in the chart for the postwar period. The aggregate Dennis A. Webb, ASA, MAI, FRICS other short-term conditions that have big pricing effects. What long period in the future.” The mortgage banks using this system of U.S. data shows that long-term values have been reasonably Primus Valuations good does it do the long-term lender to know that a transaction valuation may lend over the threshold allowed by a property’s MLV, stable; further, local market values for all property types normally Primusval.com price matches a market skewed by short-term conditions? but the excess cannot be used as security for covered bonds. Thus, a follow cycles that are reasonably well understood. Under such dwebb@primusval.com two-tier risk/cost structure for loans, which is exactly appropriate as 10 Find extended articles, charts and more online ricsamericas.org/property-world RICS Property World | Fall 2009 11 RICS-PWFall09.indd 10-11 11/5/09 2:43 PM
  • 7. Art & Real Estate Art & Real Estate Site Specific Art: Where Real sales of similar properties are sought from appropriate markets prices on the secondary market for resale are very limited and where transactions involving similar items occur with regularity. prices are comparatively modest. However, the particulars of this commission made it a unique engagement and inspired the When it comes to site-specific art however, depending upon artists to undertake other projects on a monumental scale. Estate and the Art World Intersect the purpose of the valuation, it might be appropriate, indeed necessary, to consider also the Cost Approach. Value would be Site-specific commissions promote the possibility of working on based upon the cost of duplicating or re-creating an identical a hitherto unimagined scale, adapting and transferring work piece. When the method of construction or materials used is to different media, and enabling artists to reach large, new Beverly Schreiber Jacoby, FRICS, explains why site specific art must be valued not replicable, the artist is alive, approves and is willing to re-make an audiences on a daily basis. For example, another notable new MTA identical piece, the Cost Approach method should be considered. commission is Sol LeWitt’s work at the 59th Street-Columbus Circle only by its intrinsic qualities but on the merits of the location. Artists who specialize in large-scale and site-specific works may subway station. Entitled MTA Whirls and Twirls, the mural will not enjoy robust secondary markets if their practice consists consist of ribbons of color ceramic tiles traversing the entire south of permanent installations that may take months and years to wall (floor to ceiling) of the Intermediate Mezzanine Landing at the complete. As a result, there may be few appropriate comparables. transfer point between the IND and IRT Lines. Additionally, there will be two porcelain tile floors entitled Compass (57th Street) and Actually, the artist may not need to be alive for originals to be Compass (58th Street) on 57th and 58th Street mezzanines. The re-fabricated. Sol LeWitt (American, 1928-2007), the conceptual project is scheduled to be installed in 2009. Sandra Bloodworth, artist who stressed the idea behind his work over its execution, Director, Arts for Transit (MTA), noted that MTA commissions “are died in 2007, but during his lifetime his wall drawings were diverse in every way while upholding the goal of speaking to the executed by trained studio assistants. One of the motivating riding public. From emerging artists to very well-established artists, factors surrounding the long-term retrospective of LeWitt’s work in such as Roy Lichtenstein (42nd Street Station), the works are valued Adams, Mass., at Mass MoCA was the explicit intention that the accordingly.” The MTA self-insures, but its art is covered separately. large exhibition would facilitate the training of a new generation of executants to carry on with his practice. During medieval During the 1980s when New York City was a less safe and friendly and Renaissance times, when masters belonged to guilds and town, when there were few public art or other opportunities for academies, it was understood that the studio would continue to young artists to work on a monumental scale, Keith Haring (1958- work from the master’s models after his death. Therefore, the 1990) discovered that tarps, fences and walls worked as handy approach of LeWitt’s studio is not much of a departure from supports for large scale paintings. In 1987 he executed a joyous and centuries-old practices. For an artist of such renown, with a high-spirited mural on a cinderblock wall in a children’s community decades-long roster of public and private sales, researching center gymnasium on Pitt Street (Acrylic paint on cinderblock wall; price point data combined with estimating time and labor costs 20 x 20 feet; 6.10 x 6.10 m). “The Lower East Side Boys Club “MTA Whirls and Twirls” Compass (57th Street) and Compass (58th Street) (2009) Sol LeWitt, 59th Street-Columbus Circle, A, B, C, D, 1 lines, MTA New York City Transit. would enable one to arrive at a strong basis for valuation. Mural” was one of eleven public murals Haring executed during the Commissioned and owned by Metropolitan Transportation Authority Arts for Transit. 1980s in New York and around the world. The successful “rescue” Infrastructure, transportation and official projects in the United and removal of the intact, undamaged mural from the Lower East States often include commissioned, new public art work through Side Boys Club by professional riggers, conservators and gallerists I f the real estate world operates according when valuing the work, but there are many “Percent for Art” legislation and policies. For example, New York before the Pitt Street building was demolished in 2008 was widely to the truism “location, location, location,” factors to consider. The valuation process begins City’s Metropolitan Transit Authority (MTA) has applied a portion heralded in the media. Authenticated and supported by the Keith the same motto does not necessarily apply with questions such as: Is the work of art an of its Capital Program funds to commission permanent works Haring Estate and Foundation, “The Lower East Side Boys Club in the art world. This insight informs one of element of the structure or is it an independent of art as part of the rehabilitation of subway and commuter rail Mural” can be installed as a self-standing or structural wall and the key distinctions between valuing real and object? Is it possible for the work to exist and stations. Projects up to $20 million dollars budget one (1) percent; is ready to be transported world-wide, protected in a steel-casing. personal property. Exceptional circumstances retain its value in a different location? Can projects greater than $20 million dollars spend one-half (½) As Stuart Alan Levy, a private art dealer in New York, observed, “If apart, buildings and structures do not typically professionally removing it be accomplished percent. Tunnels, escalators and disability access components are an object is structurally sound, can be appreciated as a work of move; personal property, by definition, is without damage? How does the site or structure excluded from the formulae. Key to successful designs are sturdy art, and can be relocated to an appropriate alternate venue, there movable. At the intersection of these two contribute to the value of the object? Would the materials, such as mosaic, tile, or glass, as well as low maintenance shouldn’t be any loss of value because it is moved. It could end kinds of property is site-specific art. object lose value if removed from its site? Might costs and imagery pertinent to the location. A year ago MTA arts up in a location even more prestigious than it was originally.” it gain value, particularly if it becomes accessible managers initiated a pro-active program that calls for twice yearly The term, “site-specific” is, ironically, not to more viewers elsewhere? And, finally, does inspections and condition reports on more than 200 pieces installed Levy, a member of the Fund for Park Avenue Sculpture Committee, specific enough for a careful discussion. It the work impact the value of the real estate? throughout the system to identify and prioritize maintenance issues. which partners with the New York City Parks Public Art Program, is describes everything from new, commissioned familiar with site-specific pieces from participating on a committee work designed for a specific space initiated The next step in valuing these works is to Mega projects, such as the new $530 million dollar new South of citizens with art-related expertise that organizes temporary at the early planning stages, to a piece determine the method of valuation. When Ferry Terminal in lower Manhattan to replace the old one damaged installations of sculptures along the Park Avenue malls, or medians. acquired for a pre-existing or contemplated valuing fine art for donation, estate, gift, on 9/11, are showcases for new art. The terminal boasts floor- As with the MTA, it is imperative that materials are able to site. It can embellish, enhance or even disguise financial or insurance purposes, it is customary to-ceiling glass walls silhouetted by the outlines of trees titled withstand New York’s seasons. Size is also a constraint; sculptures architectural details or structural imperfections. to use the Comparative Market Data approach. “See it Split, See it Change” by Doug and Mike Starn (American, need to be at least fifteen feet tall to be visible during the milder Value is based upon past prices for similar 1955- ). Paid $1 million dollars for the four-year project, the weather when the trees on the malls are leafy. While the committee The relationship between the work and the works by the same artist, or similar works by artists acknowledged they lost money if labor and time were handles paperwork associated with permits and approvals from structure to which it is attached affects the art another artist of equal standing and related included. Experimenting with the properties of fused glass with various New York City bureaus and covers liability, other costs work’s value and, therefore, is a consideration reputation. Current and recent comparable their German fabricator took a year. The Starn twins’ auction 12 Find extended articles, charts and more online ricsamericas.org/property-world RICS Property World | Fall 2009 13 RICS-PWFall09.indd 12-13 11/5/09 2:43 PM
  • 8. Art & Real Estate Sustainability—Property Underwriting & Valuation Ten Principles for Sustainable The following year the Visual Artists Rights Act of 1990 (VARA) codified into U.S. federal law an artist’s moral rights concerning the integrity of his/ her creations, among other provisions. Further, VARA maintains that injury to the object constitutes injury to an artist’s reputation. While VARA does not protect Property Underwriting & Valuation the placement of site specific sculpture, Scott Muldavin, FRICS, presents ten key principles of sustainable property underwriting some state statutes do. The best time to and valuation devised by the Green Building Finance Consortium (GBFC). explore and negotiate complicated issues concerning potential future scenarios regarding site specific commissions would be at the planning stage. To conclude on a happier note, let us cite an imposing mural in ten panels “America Today,” executed in 1930- 32 by the American Regionalist painter, Thomas Hart Benton (American, 1889- 1975) for the New School of Social Research in Greenwich Village. The work was purchased privately in 1981 for a seven figure price by AXA Equitable, completely restored and successfully reinstalled in the lobby of the firm’s New York headquarters. Jazzy and throbbing with energy, the figures and © Ed Gavryush scenes unsentimentally yet heroically “The Lower East Side Boys Club Mural” evoke American civic and industrial life Alkyd paint over white alkyd base on cinder block wall; acrylic varnish, 20’ x 20’ © 1987, Keith Haring at a dramatic moment in the nation’s history. On permanent view in the busy lobby of a major corporation in midtown, associated with the temporary viewings, including fabrication, Benton’s masterpiece probably enjoys greater visibility today H insurance, advertising, installation and publicity are typically than it may have during its sojourn in a university building. istorically unprecedented change in related due diligence. Guidance is provided handled by the artist, gallery or patrons, including collectors and regulator, space user and investor demand on the role of sustainable definitions in foundations. The committee relies upon the artist or gallery to Whether a work or project represents a site-specific commission for sustainable property necessitates underwriting, cost-benefit analyses, first cost assign insurance values. Robert Indiana, Deborah Butterfield, Barry or the relocation of an existing piece, successful outcomes do refinement of existing real estate underwriting considerations, green leasing, and underwriting Flanagan, and Fernando Botero, are among the acclaimed artists not happen accidentally or quickly. Rather, they are the product and valuation methodologies. Within this potential benefits, beyond cost-savings, from who have been honored with Park Avenue Mall exhibitions. of often lengthy, usually intense, even fraught, collaborations context of change, the Green Building Finance improved energy performance and enhanced deploying an army of talented specialists, from artists, architects, Consortium (GBFC) was founded to develop space user health and productivity. At the other extreme, unlike the Keith Haring Boys Club mural, fabricators and conservators, to attorneys, regulators and officials underwriting and valuation methods and which has become more valuable after removal from the Pitt Street to engineers, riggers, and lighting designers, among other diverse The book’s Chapter IV: “Sustainable Property practices to enable private sector commercial and building, there is the unfortunate saga of Richard Serra’s (American, experts whose technical skills and good-will are essential to Performance,” assesses those sustainable features multi-family property investors to evaluate “green” 1939- )”Tilted Arc,” a 12 x 120 foot slab of curved Cor-Ten steel, producing a happy result. Beyond that, issues of maintenance, risk and strategies that have posed the greatest risk, buildings from a financial/fiduciary perspective. commissioned through the U.S. General Services Administration’s management and security are not an afterthought and, ideally, and/or underperformed expectations, based on (GSA) percent-for-art program in 1979 for Federal Plaza in lower these needs are foreseen and budgeted for during the advance This article presents ten key principles of a survey of experienced consultants, developers, Manhattan. Installed in 1981, it presided uneasily over the plaza planning process. What a bonus when passers-by, occupants, sustainable property underwriting and valuation investors, and corporate real estate practitioners, until 1984 when serious controversy arose and an unsuccessful artists, critics and tourists like the work, become familiar with arising from the Consortium’s research and a review of case studies and literature, and campaign to relocate it commenced. Public debate and litigation ensued. Serra declared that since the sculpture was site-specific, • it and take it to heart as part of their everyday landscape. preparation of its foundational book being other sources. A new framework for property released in the coming months: “Underwriting performance assessment is presented outlining to remove it was equivalent to destroying it. A professional panel Sustainable Property Investment.” five key categories of performance — process, appointed by the National Endowment for the Arts (NEA) to Beverly Schreiber Jacoby, Ph.D., FRICS features, buildings, market, and financial — examine the question agreed, voting that removal would destroy President, BSJ Fine Art The book presents the foundation for that need to be measured, and how each ‘Tilted Arc’s’ artistic integrity and intent. Nevertheless, after a lengthy Bsjfineart.com underwriting including financial modeling and type of performance assessment contributes political and legal process, the sculpture was dismantled in 1989. bsj@bsjfineart.com analyses, valuation, and risk and compliance to the underwriting and assessment of risk. 14 Find extended articles, charts and more online ricsamericas.org/property-world RICS Property World | Fall 2009 15 RICS-PWFall09.indd 14-15 11/5/09 2:43 PM
  • 9. Sustainability—Property Underwriting & Valuation Sustainability—Property Underwriting & Valuation Ten Principles of Sustainable Property not financial outcomes, and thus cannot be the sole basis for performance. To assess potential financial implications of a The process is inherently qualitative, with the valuer conducting Underwriting and Valuation underwriting from a financial perspective. Practically, investors building with a specific level of sustainable performance, one numerous quantitative “sub-analyses” to generate support for the will also be confronted with underwriting properties with varying must next measure the market response (regulators, space qualitative selection of key financial inputs like rents, occupancy, While each sustainable investment decision will differ based sustainable features, performance and green certifications. users and investors) to the building’s sustainable performance. absorption rates, tenant retention, sales prices, expenses, etc. on the property type, type of investment (retrofit, new Keeping the data and types of performance separate helps construction, tenant improvement, etc.), geographic market, Most importantly, from a financial perspective, to determine to assess the fit and relative importance of information. Fortunately, as stated in Principle 1, fundamental valuation and due and sustainable features and strategies employed, ten key which certification and assessment systems are important for diligence practice is up to the challenge. The industry will be well principles of sustainable property underwriting and investment specific property, the underwriter/valuer must evaluate how GBFC’s Sustainable Property Performance Framework also served to embrace the qualitative nature of real estate analysis and have emerged from our research that provide important regulators, users and investors utilize and rely upon different provides a structure for underwriters to use in their efforts do it better, rather than holding out for the “killer” statistical study insights to guide all underwriters and valuers in their work. assessment systems or tools, and the specific sustainability to mitigate risks. Since most significant sustainable property that will, once and for all, prove the enhanced value of sustainable thresholds to achieve benefits from each group. investment decisions will be based on forecasted building property investment. Over the last three years, statistics-based Principle 1: No Fundamental Change in Underwriting performance (energy use, occupant performance, development academic studies, cost-benefit studies, and business-case analyses and Valuation Practice Necessary Principle 3: A New Performance Framework is costs, etc.) underwriters are, or should be, focused on reducing have laid the foundation for why sustainable properties can be Necessary to Support Sustainable Property uncertainty and risk related to the forecasted performance. As more valuable, but now the industry needs to invest in the data and Sustainable properties do not require fundamental changes Investment Decision-making has been proven in our research, risk and uncertainty around analytic techniques necessary to support property-specific decisions. in traditional underwriting or valuation practice. However, building performance can be significantly mitigated through underwriters, acquisition analysts, valuers and others will Property performance must be measured and evaluated on Principle 6: Cost-Based Decisions are Inherently Flawed underwriting of sustainable processes and features/systems. need to collect new information, employ new analytic multiple levels to better support financial analysis and valuation of techniques, and adapt capital request presentations to properly sustainable property investment. Five types of performance are most Principle 4: Sustainable Property Investment Financial models and decision-making practices that generate address some of the special considerations of sustainable important: process performance; feature performance; building Can Create Significant Value results based primarily on initial development and operating properties that affect financial performance and value. performance; market performance, and financial performance. costs, like the most commonly used Simple Pay-Back or Simple While operating cost savings achieved through reductions in Return on Investment (ROI) models, are inherently flawed Principle 2: No Single Definition of This framework highlights the importance of separating the energy, water, maintenance, waste, insurance and other costs because they fail to consider revenue or risk. The limitations Sustainability is Sufficient different elements of sustainable property performance in order get the most attention, it is the significantly increased demand by in these models have always existed but due to the dramatic to properly evaluate financial performance. Our research shows regulators, space users, and investors since 2007 that drives value. increases in regulator, user and investor demand for sustainable Existing green building certifications like LEED®, BREEAM, CASBEE, that process performance drives the success of sustainable properties during the last few years, failure to consider GreenStar, or Green Globes™ measure environmental outcomes, features and systems, which, in turn, determine building Regulators across all levels of government and national boundaries revenue and risk implications has become more critical. have embraced the property sector as “low hanging fruit” in the battle against climate change. Incentives are increasing Simple Payback, Simple ROI, and related cost focused models and regulations are becoming broader and deeper, moving can still provide useful information for decisions between toward mandates in many areas. Space users are increasingly different strategies or features (type of lighting systems or influenced by sustainability. Government tenants, vendors bulbs, material or product selection, etc.) and many sustainable to sustainability leaders, companies with direct ties to the decisions can be made utilizing these techniques, but as the sustainability industry, and companies now able to capitalize level of investment and sustainable outcomes desired increases, on the enterprise value benefits of their sustainable real estate analyses that do not factor in revenue and risk implications investment are leading the movement toward sustainable space. will result in inferior financial performance for properties. Institutional investors are leading the industry, with most new development being built at sustainable levels and significant Principle 7: Sound Sustainable Property Financial Analysis work being done to assess and upgrade existing portfolios. Requires Consideration of a Discounted Cash Flow Model Increased demand by regulators, space users and investors Fortunately, the most widely recognized financial model for positively influences revenues (rents, occupancies, tenant retention, evaluating real estate investments—discounted cash flow analysis regulatory incentives, etc.) and risks (capitalization and discount (DCF), is well suited to address the financial implications of rates). These positive revenue and risk benefits, in combination with sustainability. Discounted cash flow analysis provides a conceptual operating cost savings, outweigh enhanced risks and costs, many framework and model that enables the user to integrate of which can be mitigated through improved contracts, integrated quantitative and qualitative analysis to measure sustainable property design, commissioning and other processes and practices. financial performance. Most importantly, it provides the means to translate the “intermediate” sustainable property cost and benefit Principle 5: Determining “If” Sustainable outcomes like health or productivity benefits, expedited permitting, Investment will Enhance Value at Property or lower operating costs into financial measures like rate of Level Requires Micro-Level Analysis return or net present value traditionally used by real estate capital providers. Revenue and risk are integrally part of the approach. Simply put, a valuation or due diligence analyst must determine whether the strong “general” arguments (outlined in Principle The challenge is to assess the applicability of the general 2 above) supporting enhanced value for sustainable property argument outlined above for a specific property. In this regard, investment apply to a particular property given planned even if the decision-maker does not execute a full DCF model, sustainable features and strategies, the property type, the understanding the logic and linkages inherent in a DCF model to geographic region, expected occupants, market conditions, etc. To learn about advertising opportunities, 16 Find extended articles, charts and more online ricsamericas.org/property-world RICS Property World | Fall 2009 17 email hshostack@rics.org RICS-PWFall09.indd 16-17 11/5/09 2:44 PM
  • 10. Sustainability—Property Underwriting & Valuation Real Estate & Economy—Canada Canada’s Real Estate Markets accurately articulate potential implications of sustainable property Principle 9: Sustainable Properties Need to Improve their RAP attributes on financial performance can significantly framework, it is easy to under- or over-estimate the magnitude and even A more sophisticated analysis and presentation of risk (RAP) the direction of potential financial performance implications. is particularly critical to sustainable property investment. This is due partially to the additional risk possible due to Principle 8: Six Distinct Steps are Necessary new processes, products, systems, construction techniques, Sheila Botting, FRICS, looks into why the Canadian economy and commercial real to Sustainable Financial Analysis contractors, and other service providers as well as the estate market are proving more durable during the global financial crisis. substantial positive risks related to reducing the potential These steps are: for functional and economic obsolescence due to regulator, space user and investor change, among other factors. 1. Select financial model, 2. Evaluate subject property “sustainability,” While many detractors of sustainable property investment 3. Assess costs/benefits of “sustainability,” say tenant or investor demand, or other risk issues cannot 4. Evaluate the financial implications of costs/benefits, be “quantified,” valuers and underwriters cannot ignore well- 5. Determine financial model inputs, and recognized and documented trends. For example, failures to 6. Risk analysis and presentation. Failure to implement each address “outsourcing” and other market changing trends in the step can result in leaving out key issues, misallocation past led to many bad investments and failed valuations by industry of the importance of key issues, and other problems. professionals. Risk does matter and decision-makers need better organized and documented risk analysis to make proper decisions. In selecting financial models, valuers must employ Sustainable Sub-Financial Analyses. Sustainability Sub-Financial Analyses Principle 10: Sustainable Property Underwriting is © Howard Sandler are those analyses and models that provide quantitative More than just Financial Analysis and Valuation insight/data that is typically combined with other information and analyses to aid valuers/financial analysts in their Decisions on sustainable property investment are based on specification of key financial assumptions in a DCF analysis, more than just financial pro-formas and valuation estimates. or related Traditional Real Estate Financial Model. For lenders and investors, the borrowers and project sponsors need to be fully underwritten as to their experience, net worth, G The critical point in understanding Sustainability Sub-Financial track record, and other factors. For new construction projects, lobal economies abound with dismal but Several factors contribute to Canada’s resilience Analyses is that in most cases these analyses do not result in specific construction risk must be analyzed and mitigated through improving news — high unemployment, including stable and conservative financial data inputs that you can input directly into a DCF analysis. For insurance and various forms of surety. Construction and property low GDP, weakened consumer spending, institutions and lending practices, a diverse example, in many cases, potential health cost savings as a result of management agreements, franchise agreements, leases, and reduced demand albeit improving, unbelievable economy, competitive investment returns sustainable property investment will accrue directly to an owner- other contracts need to be evaluated. Corporations need to debt, significant stimulus monies, restrictions on and real estate markets based on solid occupant. However, for an investor-owned building, the key issue in evaluate occupancy costs, but also must assess the role and capital and for real estate, few if any transactions. fundamentals. Once the economy rebounds, a estimating the financial impacts of potential health cost savings is contribution of the real estate to their overall enterprise strategies, Canadian real estate delayed its entry into true strong foundation exists for a stable real estate to look at how tenants value such potential benefits, and then how and insure flexibility to respond to future market change. recessionary conditions but fell early in 2009. That future in Canada’s commercial markets. they value these benefits in the context of all the other benefits said, compared with other countries, Canadian and factors that enter into their selection of space. Accordingly, Conclusion World Economic Forum Claims Canada has vacancies remain reasonable, rents although any quantitative health cost “sub-financial” analysis is only a softer are solid and bankruptcies and mortgage Soundest Financial System in the World Underwriting and valuation of a specific sustainable property contributing factor to the development of financial inputs for a defaults remain nominal. New office buildings requires a disciplined approach to assess the applicability of the Canada’s leading position through the economic DCF, or related analyses. However, such analyses, if independently with green features are leasing at solid rates. compelling general arguments supporting enhanced value from downturn can be attributed to the strength done and appropriately presented, can significantly influence the Analysts continue to be amazed at the durability sustainable property investment. The methods and practices needed and stability of its banking system. With banks investment decisions and resulting property financial performance. of Canadian markets during this recession. will vary based on the property type, geographic region, type worldwide — particularly in the United Clearly understanding costs and benefits resulting from of decision (retrofit, commercial interior, new construction, etc.) States — experiencing record losses, closures, Across investment and leasing markets, sustainable property investment is critical, but cannot be and type of decision-maker (lender, investor, corporation, etc.). and government support, Canadian banks have participants have delayed major decisions, instead the end of the analysis. Once these benefits are known, the opting to “wait for the bottom” and remain posted profits in recent quarters. A year ago, the Fortunately, traditional real estate underwriting and next key step is to assess how the market (regulators, space on the sidelines. Well capitalized vendors are World Economic Forum dubbed Canada as having valuation practices are well suited, with refinement, to users and investors) are likely to respond to these sustainable holding on for better times, while prospective the soundest financial system in the world. this task. The ten principles discussed above, along with outcomes — resource use, occupant satisfaction, sustainable purchasers await deal-making opportunities. In the more detailed work of the Green Building Finance More recently, Canada’s four largest banks certification, etc.). The final step is to determine key financial a rising market, “market proof” is required to Consortium can assist in improving underwriting and increased their ranking among North American inputs like rents, occupancies and capitalization rates factoring corroborate ascension to a higher plateau. A valuation to enable private sector investors to maximize their financial institutions to become the 7th to 10th • in all the sustainable and non-sustainable factors influencing declining market requires an intuitive approach financially supported sustainable property investment. largest banks as measured by assets. Led by the the property’s financial performance. It is important to by investors. Canadians are conservative by understand that sustainability will always be one of many issues Royal Bank of Canada (RBC), which has tripled Scott Muldavin, CRE, FRICS nature and prefer to wait rather than rush toward to consider and cannot be evaluated accurately in isolation. assets during the past decade, TD Canada Executive Director decisions. Recent economic signals show GDP will Trust, Scotiabank, and Bank of Montreal (BMO) Green Building Finance Consortium bottom at -2.9 percent for 2009 and economists remain the top performing Canadian banks. Greenbuildingfc.com forecast 2010 GDP in the 2.6 percent range smuldavin@muldavin.com commensurate with U.S. indicators (Figure 1). 18 Find extended articles, charts and more online ricsamericas.org/property-world RICS Property World | Fall 2009 19 RICS-PWFall09.indd 18-19 11/5/09 2:44 PM
  • 11. Real Estate & Economy—Canada Real Estate & Economy—Canada Canadian Industrial Markets Industrial real estate is the largest asset class with some 1.5 billion square feet across the major markets. The Greater Toronto market is the third largest market in North America (behind only Chicago and Los Angeles) and holds approximately half of Canada’s industrial space. Toronto is the manufacturing backbone of Canada and is dominated by the automotive industry, producing roughly one in six North American automobiles. Toronto also serves as the regional and national inland distribution hub. Other large industrial hubs include the Port of Vancouver and inland Calgary hubs for western Canada along with Montreal and Halifax in the east. Canada’s industrial markets provide portfolio stability due Figure 1: Markets Decline—US & Canadian Recession (GDP) Figure 3: Industrial Vacancy Rate Figure 4: International Investment Yields to their mature and diverse nature. Figure 3 shows that BMO Nesbitt Economic Research Cushman & Wakefield (Q2 2009) IPD Multinational Index industrial vacancies have consistently remained in the 4 to 7 percent range, consistently below U.S. markets since 2000 as new supply has been balanced by market demand. Some of the disparities in performance between U.S. and Montreal, Calgary, Vancouver, and Ottawa (the nation’s 2009, all asset types continued to experience year-over-year Contributing reasons for the historically strong and stable Canadian banks can be attributed to the fundamental differences capital) are other large Canadian office markets, each with declining rates of return due largely to an erosion in value. performance of industrial real estate investment include: in the banking systems. Canada tends to have more restrictive unique occupancy characteristics and demand drivers. lending and capital boundaries, a concentrated number of Given the above, a key investment strategy among many • broad-based user/occupancy structure; institutions, nationwide branching, and less leveraged capital. During the peak of 2005 and 2006, unprecedented low vacancy institutional players has seen a shift from income-producing • relatively low cost of re-tenanting and retrofitting space; These fundamentals allow Canadian institutions to respond and rates, high levels of demand and rising rental rates spurred new assets during the peak years of 2005-06 to buying debt. • and positive long-term industrial market leasing diversify nationwide. Geographic diversification also acts as a construction across Canada. As a result, there is a considerable Long-term investors continue to seek low-risk investments performance and prevailing low vacancy rates. method of mitigating investment risk, which is especially important new development underway in Downtown Calgary (more than 8 to balance their portfolios. Prospective vendors have only when balancing the resource and tourism sectors in the west million square feet) and Downtown Toronto (more than 3 million recently begun to acknowledge the new reality of higher Canadian Office Markets with manufacturing and financial services in central Canada. square feet), most of which will be completed between the second capitalization rates. As well, financing for real estate has Canada’s office markets total approximately 414 million half of 2009 and year-end 2011. While traditionally tight office diminished substantially. As a result, investment volumes are Nationally Diverse Real Estate Markets square feet of space. Again, Toronto is the most significant markets have softened, the new supply anticipated during the down significantly from those seen pre-2008, and, overall, Canadian market with 163 million square feet, comprising next several years will undoubtedly place downward pressure on deals are taking longer to consummate. Prevailing purchaser Canada is geographically the second largest country in the achievable rents as landlords seek to retain tenants in the face sentiment suggests that capital is once again looking to the fifth largest market in North America. Toronto is the world with almost 10 million kilometers squared (or 3.85 million of rising vacancy. In Toronto, a range of tenants are moving from commercial real estate markets for investment opportunities. financial capital of Canada and dominated by banks and square miles), with the longest coastline and longest border with older downtown towers to the newer “green towers” that offer financial institutions along with their service providers another country, the United States. Yet Canadian urban centers competitive operating costs and sustainable environments. Across investment and leasing markets, participants are including legal, accounting and other professional services, and indeed its real estate markets stretch along the Canadian/ delaying major decisions, instead opting to be patient and as well as being home the nation’s primary stock exchange. U.S. border and combined are only the size of New York City’s Globally Competitive Investment Returns wait to take advantage of opportunities. As a result, Canadian Government and health care are also significant space users. markets. Canada’s major markets are shown in Figure 2. markets are well positioned for acquisition opportunities Canadian investment returns have remained competitive based on sound fundamentals, along with an opportunity Office Industrial globally and have therefore attracted numerous international investors seeking solid risk-adjusted returns. Similar to global for value improvements when markets rebound. • trends, Canadian real estate has faced increasing capitalization Inventory (sf) Vacancy Rate Inventory (sf) Vacancy Rate rates and decreasing values during the last year, as well as Sheila Botting, FRICS, FCMC, AACI (Hon) Vancouver 46,453,294 6.9% 181,087,548 4.2% a sharp decline in transaction activity. That said, Canada Senior Managing Director Canada, Capital Markets tends to have a disciplined and stable real estate investment Cushman & Wakefield Ltd. Calgary 52,960,967 10.2% 103,282,241 5.3% environment compared with international markets. This stability Cushwake.com Edmonton 23,879,721 6.9% 95,051,577 2.5% is in part due to a high concentration of ownership among Sheila.botting@ca.cushwake.com Toronto 162,830,064 6.6% 834,970,979 7.1% pension funds and major investors that is particularly focused on downtown office and major retail assets. Furthermore, Ottawa 36,171,011 6.5% 22,364,490 4.4% Canada’s lending and new development practices have limited Montreal 82,446,396 8.9% 277,144,076 8.2% new supply to largely reflect demand within most markets. Halifax 9,411,007 9.3% 6,465,783 8.7% See more in-depth graphs for Major Market Summary 414,152,460 7.6% 1,519,432,804 6.5% Total annual real estate returns during 2005 and 2006 reached inventory, vacancy and returns at highs in the 17 percent to 21 percent range as owners enjoyed considerable capital appreciation. This range dropped ricsamericas.org/property-world Figure 2: Canada’s major real estate markets Cushman & Wakefield (August 2009) significantly to just 1 percent to 7 percent in 2008. As of June 20 Find extended articles, charts and more online ricsamericas.org/property-world RICS Property World | Fall 2009 21 RICS-PWFall09.indd 20-21 11/5/09 2:44 PM
  • 12. Real Estate & Economy—Mexico Real Estate & Economy—Mexico Mexico in Time of Crisis: Economic Activity GP Nominal (US$ millions) Real GDP (real annual change %) 2007 1,022,706 3.3 2008 1,085,599 1.4 2009 F 844,650 -6.3 2010 F 933,924 1.7 The Impact of GM’s Bankruptcy on Mexico’s Industrial Real Estate and Economy International Reserves (US$ billions) 80.137 82.0 Inflation (average %) Oscar J. Franck Terrazas, MRICS, assesses the impact of General Motors’ bankruptcy on Mexico’s industrial and commercial real estate—and economy overall. Headline 3.8 6.5 3.8 3.9 Core 4.1 5.7 4.0 3.7 Financial Markets Interest Rates (%) Bank Funding 7.50 8.25 4.50 4.50 28 day Cetes (Federal Treasury Certificate) 7.44 7.94 4.47 5.02 28 day TIIE (Interbank Equilibrium Interest Rate) 7.93 8.68 4.83 4.87 10 year Bond (average) 8.04 8.28 6.40 7.20 Exchange Rate with USD (average) 10.86 13.67 13.00 12.40 Public Finances Fiscal Balance (% of GDP) 0.0 -0.1 -1.8 -1.8 © Oscar J. Franck Terrazas Financial Requirement of the Public Sector (FRPS, % of GDP) -1.1 -2.1 -2.8 -2.8 External Sector Trade Balance (US$ billions) -10.1 -17.3 -16.2 -18.5 Current account (US$ billions) -8.3 -15.7 -16.3 -19.8 Oil (Mexican mix, DPB, EOP) 61.7 84.4 70.8 73 A fter the dust settles from automotive (with whom Obama has deep obligations), the Mexico Country Risk Facor (EMBI+) J. P. Morgan 175 bb Uncertain* giant General Motors’ bankruptcy the billions of dollars that the U.S. Treasury would fallout may come to benefit Mexico. have had to assign to keep GM afloat would have Figure 1: Mexico Economic Forecasts 2009–2010 Data Source: BBVA Bancomer Economic Research Dept. and data from O. Franck Research June–October 2009 Under the pre-planned, negotiated bankruptcy, come with an additional price tag: the closure of (EOP = End of Period, DPB = Dollars Per Barrel) *Tendency depends on the pending of 2010 Fiscal Package where GM is ridding itself of the heavy union and foreign GM plants before any United State closures, debt chains that pulled it to nearly irrecoverable notwithstanding the performance issues of some depths, GM will close 13 plants. Undoubtedly, of the U.S. plants. Under that scheme, it would Moreover, he stated that the plants in Mexico would not be a part of around $4.95/SF per year, compared to [an average rate of the ones to be shut down will be the ones that have been likely that many of the 13 “laggard” the bankruptcy procedures. GM has been quite a profitable market nearly twice as much for in locations North of the border] $9.75/ are less productive. The most successful plants plants that GM is closing would have remained leader in Mexico for more than a decade and as a result its dealer and SF (average) per year in southern Texas or Southern California. will remain open and active, especially the plants in operation. By taking the path of a prearranged production network may remain nearly unchanged in that country. • Substantially lower labor costs prevail in Mexico. For example, located in Mexico and Canada. In fact, the four bankruptcy, General Motors frees itself from most a salary for a basic auto worker in Mexico is $4.25/hour, According to Mauricio Kuri, General Motors of Mexico (GMM) including benefits. Compare this with the latest “reduced” plants that GM has in Mexico are among the best of its shackles that have hindered the company spokesman, the company foresees a production increment by wages of a GM basic worker, which is about $28.00/hour performing plants for the company worldwide. during the course of the last few decades, the second half of 2009. Others, perhaps much more optimistic, (excluding benefits, estimated at approximately $6.00/hour). including uncompetitive labor costs, unsustainable talk of the possibility of seeing more GM plants open in Mexico With salaries such as these, Mexico can compete even with retirement plans, too many dealerships, non- How important is the auto profitable brands, a mountain of debt, and so on. in the near future, and the same can be said for Ford, even Chrysler, and Volkswagen which plans to invest $400 million China, in offering a strategically close location, and cultural and business practice similarities (it is very rare to find a in a new assembly plant in Puebla and see an additional $600 Mexican executive who is unable to speak fluent English). industry for Mexico? Simply At the same time, under the chapter 11 format, President Obama is able to wash his hands of the million invested by 2010.There are many advantages offered by Furthermore, the production quality level of the Mexican UAW political compromises, the Treasury provides Mexico to continue to retain and attract industry. Among them: plants is reportedly higher than their counterparts in China. put, it is fundamental. the funding needed for GM to re-invent itself while passing the bill to the taxpayers, and in the • The current Peso-U.S. Dollar exchange is strong, currently floating around 13.5 x 1. How important is the auto industry for Mexico? Simply put, it is end President Obama may come out as the hero. fundamental. Automobile and auto parts production constitute 14.4 The concern among those in the auto industry • The easy and cost-competitive communications and percent (equivalent to $42 billion) of the total country exports and in Mexico and of the large industrial real estate When addressing the first round of questions transportation between Mexico and the United States. 18.5 percent of the manufacturing exports. More than 75 percent portfolio managers was that if GM had avoided when Chapter 11 was announced, new GM CEO • A much lower cost of industrial real estate and industrial space of the automobiles manufactured in Mexico are exported to the bankruptcy by striking a deal with the Obama Fritz Henderson made it clear that the plants in lease compared to the costs in the United States. Mexico’s average United States. Foreign investment in Mexico’s auto industry averages administration and the auto union workers Canada and Mexico would remain in operation. market rent for quality industrial manufacturing space averages 22 Find extended articles, charts and more online ricsamericas.org/property-world RICS Property World | Fall 2009 23 RICS-PWFall09.indd 22-23 11/5/09 2:44 PM
  • 13. Real Estate & Economy—Mexico Real Estate & Economy—Italy The Challenge of Real Estate about $2 billion per year since the 1990s. However, Mexico’s auto of 2009, accentuated by Mexico’s oil export platform which is in a sales have decreased 30 percent in 2009, due to the prevailing downward trend. Core inflation has risen from a 3.5 percent average world economic meltdown and the United States’ auto crisis. in 2007 to an estimated 4 percent at the closing of 2009. In the first five months of this year, 309,000 formal employment posts were lost Investment In Italy General Motors in Mexico and more than one million jobs lost since the peak of October 2008. The employment fall is one of the greatest concerns in this recession. General Motors has a much stronger profile and market share in Mexico than in the United States. GMM has been leader of Real Estate Synopsis the Mexican market for the past 13 years. GM has been in Marzia Morena, MRICS, details the role played by Local Public Administrations Despite the global economic slowdown, 2008 was a good year for the housing industry and commercial real estate, maintaining in Italian town transformation and redevelopment processes. Mexican manufacturing its absorption and rental level close to their historical highs. 2009 is a year of challenges and opportunities, as the industry players exports to the U.S. began implementing precautionary measures months ago. In the low- and medium-income housing sectors new construction has significantly slowed down, decreasing inventories. Providing underwent a 22.7% this trend persists, we can anticipate a prompt recovery. decline through the The construction industry lost momentum, having a negative expansion toward the last quarter of 2008 (an annual -1.1 percent), leaving major challenges for 2009. INFONAVIT, the National Institute first quarter of 2009. Housing Fund, will provide an estimated half a million mortgage loans in 2009, planning to increase this number in 2010, playing a central role in the stimulation of the construction industry. In its 2009- Mexico since 1935 and was employing 6,522 hourly workers 2013 plan, INFONAVIT will introduce important changes, including and 626 salaried workers in four plants before a 12 percent the creation of the “Green Mortgage” for sustainable housing. © Howard Sandler cut announced last August. General Motors also buys 30 percent of all the auto parts manufactured in Mexico. During The real estate market for coastal cities, where foreign buyers 2008, GM purchased $11 billion dollars on parts. were the core business, has been the most affected. In addition to the real estate crises in the U.S., which drastically affected If GM had been “bailed out” without a Chapter 11 proceeding, it sales to foreign buyers, the security factor has played a major role would probably have had shocking consequences, including the likely in the severe decline of this once highly profitable segment. closure of its plants in Mexico. This would have had a domino effect, A taking down many of the Mexican auto parts manufacturers and Rents for good quality industrial building space are under ssoimmobiliare, DS&P Studio Legale According to Gualtiero Tamburini (President would have had a severe impact on the industrial real estate market, pressure, so the current national average rent of $4.80-per- Associato and the Gesti.Tec Lab of Milan of Assoimmobiliare) the time-consuming and which is already under intense pressure from the economic slowdown. square-foot/year may decrease slightly in the short term and Polytechnic have recently launched a confusing procedures followed by the Local lease conditions may become more flexible. For the longer term, joint project: the creation of the Osservatorio Public Administrations in Italy, as compared to GM has now a unique opportunity to correct its course, becoming rents may go back to a yearly growth of around 3 percent, as Permanente sulla Pubblica Amministrazione other countries, is a well-known burden since, a much leaner company, focusing on a few core brands, creating demand for quality industrial space increases, triggered by Locale (PAL — the Permanent Observatory on the in the list prepared by the World Bank every new models that will appeal to the American consumer and be the economic recovery and foreign manufacturers seeking to Local Public Administration), an agency intended year on the “openness to business” score, Italy competitive quality-wise and price-wise with foreign brands. GM remain competitive by establishing operations in Mexico. to map and analyze in depth the methods and ranks much lower than one would expect, is also now free to reach an agreement with the UAW, which the time requirements for Public Agencies to pass especially considering that its development has displayed a willingness to become a part of the solution, Mexico has proven in the past its high resiliency and ability to town-planning implementation instruments. stage allows it to be part of the G8. Not all allowing the remaining plants in the United States to be truly recover from deep recessions and the former instability of the LPAs present the same challenges, though, competitive and a major long-lasting source of employment. Peso. Fortunately for Mexico, people, businesses and industrialists The Permanent Observatory idea was devised and Rome and Milan are more advanced in learned in the past to function with little or no credit, creating by attorney Riccardo Delli Santi (DS&P Studio their procedures than other cities in Italy. Mexico’s Economic Outlook a strong cash culture. So we expect to see Mexico bouncing Legale Associato) and Professor Oliviero Tronconi back sooner, rather than later. Mexico’s shorter route to recovery (Gesti.Tec Lab — BEST Department — Milan The role of the Italian Public Administration Mexico’s economic crisis bottomed up during the third quarter facing will be made possible by its strong international reserves, and Polytechnic). As these two professionals were a 10.3 percent decrease of its economic activity; the worst since the Great Depression. One should remember that in addition to the moderate fiscal and budget government policies. • discussing the major issues burdening real estate investments in Italy, they decided to Since its action is required during the planning stages of a project, the Local Public global economic crisis, Mexico had to contend with the influenza design and coordinate a project aimed at Administration (LPA) is the link in the property H1N1 epidemic, which seriously affected the tourism trade (at its peak analyzing the status quo in some of the most development chain that most influences of decline, hotel occupancy rate was at 25 percent), one of Mexico’s Oscar J. Franck Terrazas, MRICS important Italian Local Public Administrative the feasibility of real estate investment. top income sources. Foreign remittances from workers abroad have Managing Director Agencies. They were deeply convinced that also substantially diminished as work opportunities did as well. Integra Realty Resources-Mexico The project survey analyzed the town- the Local PAs play a decisive role in town Irr.com planning and building procedures transformation and redevelopment processes. Mexican manufacturing exports to the U.S. (Mexico’s number one ofranck@irr.com customer), underwent a 22.7 percent decline through the first quarter 24 Find extended articles, charts and more online ricsamericas.org/property-world RICS Property World | Fall 2009 25 RICS-PWFall09.indd 24-25 11/5/09 2:44 PM
  • 14. Real Estate & Economy—Italy Construction Assessment The Value of Continuous Program Assessment: implemented in the largest Italian municipalities. It studied requires careful planning of all the variables and, more the efficiency of permit-granting procedures by analyzing: specifically, of the time element: a postponement may turn a promising investment into a non-performing one. A Construction Owner’s Perspective • the time requirement and the method applied to issue town-planning and building permits; But being able to activate investments also means providing • the charges for primary and secondary urbanization works; potential investors with reliable information about the time it takes • the monetization of standards; to issue permits. Without this “assurance,” investors will likely • the process of gathering and organizing the not consider investing in a project since they might run the risk of Alexia Nalewaik, MRICS, advocates for involving the auditor on a continuous basis necessary documents to define a project (the seeing their efforts thwarted and the financial resources sunk. The to ensure construction projects stay on budget and on schedule. technical implementation rules — NTA, the tables ability of the LPAs to provide information and certainties about in the overall development plan — PRG, etc.); time requirements to issue the compulsory permits is therefore • and still more general information concerning the three-year a decisive element to attract investments to a specific territory. plan, project financing procedures and the activity of Town Renovation Companies. The uncertain time requirement for the approval of licenses and permits, and the lack of clarity concerning the consequences The survey produced the Rapporto 2008 (Osservatorio Permanente of unforeseen events that may arise during the administrative sulla Pubblica Amministrazione Locale (PAL) “L’efficienza dei process, are already the most likely source for a lack of processi concessori. Rapporto 2008,” Il Sole 24 Ore, Milano, confidence by potential investors, not only foreign ones, who 2008), the first product of the Observatory designed as a reliable would otherwise be happy to invest in Italian real estate. information tool for the real estate community, and also as Creating leaner bureaucratic procedures is, therefore, among the a tool to bring investors closer to Public Administrators. top priorities for the LPAs to attract investors to their territory, and © giedrius_b The aim is to encourage a dialogue and a preparatory to prove that they are able to manage the bureaucratic town- discussion for the development of our territories and of planning and building procedures in an efficient and effective way. the whole country, as a system on the one hand and to The latest World Bank Openness List reports a remarkable encourage LPAs to share best practices on the other. worsening, with Italy being moved down from the 59th rank F or organizations that receive public funds for bond funds. According to Generally Accepted The Observatory is pursuing an annual, constant and permanent to the 65th. The 65th rank on the “ease to do business” list is capital improvement programs, an annual Government Auditing Standards (GAGAS), research effort on this topic, for the information to be outdone by the 83rd ranking in the “management of building audit is often mandatory. One owner has taken performance audits involve “a determination consistently more relevant, reflecting future developments in permits” parameter (and, for Italy, this ranking comes second only the process a step further, involving its auditor on of the economy, efficiency, and effectiveness of the practices adopted by the Public Administration Agencies. to the fiscal parameter), where the average time required to issue a year-round basis and thus embracing continuous government organizations, programs, activities, a permit is estimated at 257 days. The target for Osservatorio organizational evolution. Through on-going and functions, in addition to their compliance The efficiency of permit-granting procedures Permanente sulla Pubblica Amministrazione Locale for the future review and comment, the audit staff facilitates with laws and regulations” (Davis, 1990). The is to prepare a similar list of our Public Agencies and explain Italian Local Administrators are unable to meet the expectations the process of continuous quality improvement, District has expanded that definition to include a the reasons for the various time requirements recorded, with of international operators. We believe a local government that allowing progress to occur on a real-time basis. comprehensive operational program evaluation the aim of stimulating an honest competition among them. operates in a transparent way and is able to inspect town- against corporate and industry standards, which The Los Angeles Community College District is assesses how and to what extent the program planning and building files in a timely way is distinctly more The results of the study one of the largest community college districts achieves its goals. This assessment provides a attractive to international capital investors. This would turn a Overall, as a result of the Osservatorio’s activity, LPAs in the country, educating more than 200,000 deeper appraisal of the District’s capital program situation of mistrust into an opportunity, both for the operator, around the country are becoming more sensitive to their students every year. The nine campuses of activities than can be obtained from conventional who can maximize returns, and for the local government, which will be able to collect higher fees from private operators. influence and impact on development in Italy. • the District serve students in more than 36 cities, covering an area of approximately 900 internal and statutory financial audit, looking not just at historic expenditures but also at the present The primary responsibility to lead the improvement-development square miles in Southern California. The District and future of the program. LACCD’s auditor process lies primarily with the LPAs. The towns that are able to Marzia Morena, MRICS currently is undertaking the largest public sector compares actual operations to established policies plan their development and improvement must prepare marketing Polytechnic of Milan, Italy sustainable building effort in the United States. and procedures, at the same time comparing both tools to inform investors about their goals and opportunities. BEST Department The Proposition ‘A’ Community College Facilities of those to industry-wide performance standards Polmi.it Construction and Repair Bond Program was and traditional capital project expectations. According to Professor Tronconi, this process is a basic first Marzia.morena@polimi.it approved by voters in April 2001 to provide $1.245 step to pool the resources in a territory and to stimulate billion in improvements to District facilities. That Throughout the entire operation, the participants shared expectations. This is the decisive element that bond was later supplemented by Proposition maintain “…a questioning attitude as to allows Public Administrators first to inform and, later, to Check out more advanced analysis ‘AA’ (May 2003), Proposition ‘J’ (November why operations are conducted as they are.” attract direct domestic and international investment. 2008), and State funds for a comprehensive (Dittenhofer, 1971) The team examines capital of the study results, including capital program totaling $6.1 billion. expenditures to assure controls are functioning, Among such investments, real-estate investment plays a decisive role in renovating the fabric of a city, in improving detailed charts and survey data, at The State of California Proposition 39 requires an while at the same time assessing nonfinancial aspects such as organizational structure, planning its functionality, and its architectural and urban quality. Any ricsamericas.org/property-world annual independent performance and financial and decision making, communication, staffing, investment, and real estate investment is no exception, audit for all school capital programs receiving public reporting, and more. It has been noted that 26 Find extended articles, charts and more online ricsamericas.org/property-world RICS Property World | Fall 2009 27 RICS-PWFall09.indd 26-27 11/5/09 2:44 PM
  • 15. Construction Assessment Construction—Caribbean Concern in the Caribbean: operational audits of public entities have often “been performed • Willingness to address tough questions by non-accountancy consulting firms, indicating a definite shift and challenge the status quo; from audit in the financial sense to audit of the operations and • Clear goals and accountability for results — focus management performance of companies” (Lane, 1983). Where on performance and productivity; the audit has been performed by a traditional accounting firm, the team may include specialty consultants with deep expertise in project controls and capital program management. • • Talented staff of management and technical experts as well as auditors; Access to outside experts to bring new Strategies for Surviving the Economic Crisis perspectives and knowledge; Since the District’s bond program inception in 2001, audits Steve Rajpatty, MRICS, writes in the July-September 2009 issue of Caribbean Construction Digest • Ability to create partnerships — public and private by three firms have yielded 157 improvement opportunities, experts working in tandem to improve operations; that maintaining the status quo in Caribbean construction is not a program for success. balanced by a lengthy list of good practices. The impacts • And identification as an agent of change…promoting a culture from the performance audit over the years have included the oriented toward superior performance, high-quality services, and evolution of contract language, streamlining of the program cost consciousness.” (Clark, 1993) team, simplified reconciliation with the finance department, more frequent team communication, commissioning process The Los Angeles Community College District meets improvement, and change management. Items that needed these criteria, and more, acting as a change agent improvement in previous years have been listed as good practices in subsequent years, representing continuous improvement on • and catalyst in public sector construction. the part of the District staff and Build-LACCD expanded team. Alexia Nalewaik, MRICS, CCE, MSc Principal What owner or project culture is best suited to engaging QS Requin Corp. an auditor as a continuous participant in the capital qsrequin.com program life cycle? The following characteristics apply: alexian@qsrequin.com • “Strong commitment by the executive; and Larry Eisenberg, MPA © Maria Skaldina • Independence…to avoid the perception of undue bias; Executive Director, Facilities Planning & Development Los Angeles Community College District LACCD.edu J ob security is one of the greatest concerns for be one of the toughest challenges they will face Providing Advice to Leadership on those employed in the construction industry today. During the prolonged construction during their careers, the question for us is, how do we deal with these challenges ourselves? Regional Planning and Urban Development Issues boom over the last decade, many became accustomed to a fairly comfortable lifestyle, with The Problem only moderate concern for the future. Today, According to available data, the United Kingdom the very real threat of unemployment is not has disposed of a record number of jobs for the an easy matter to deal with. More importantly, first time in 12 years. Similarly, the United States nothing intensifies the fear of unprecedented unemployment rate rose just above 9 percent unemployment levels throughout the Caribbean as of autumn 2009. We have seen Obama’s than our leaders’ inability to be proactive in bold stimulus package and several other plans articulated by leaders of the more developed The road to a successful nations. Unfortunately, the Caribbean, as a single market, has not yet taken proactive steps to deal with the eventual mass unemployment future and a vibrant within the construction industry. Whilst many of the region’s academic thinkers (economists, construction sector will financial and market gurus) have voiced their opinions on the situation, the fact remains that the implementation of any solution must not be an easy one. be driven by the government. With several construction firms reporting very little activity within recent months, thousands of construction confronting the economic crisis. As we watch workers will be facing the breadline if solutions even the most accomplished leaders from Real E t t E R l Estate Economics i around the globe tackling, what may very well are not identified and implemented soon. However, the ‘fly in the ointment’ lies in the For information contact: Growth Management Hemson Consulting Ltd. John Hughes, FRICS 30 Saint Patrick Street Russell Mathew, MRICS Municipal Finance Toronto, Ontario, Canada 28 Find extended articles, charts and more online ricsamericas.org/property-world RICS Property World | Fall 2009 29 +1.416.593.5090 www.hemson.com RICS-PWFall09.indd 28-29 11/5/09 2:44 PM
  • 16. Construction—Caribbean observation that there appears to be a construction leadership find a way to integrate our local workforce with the foreign vacuum among governments throughout the Caribbean region. experts. Sharing knowledge creates an environment where people begin to operate more efficiently and effectively. This may be due to the fact that although governments are meant to manage the economic, political, social and domestic affairs Equally important is the fact that we don’t have to continue of their economies, this does not necessarily mean that they are believing that our local professionals and contractors would equipped to deal with the business threats and opportunities always exceed their budgets and schedules and that their quality that exist within the macro environment. Their political agenda would almost certainly be a sour issue. While it remains difficult might not be in sync with sound business principles and to manage both cost and quality at the same time, we must also practices. Indeed, this problem is even more complex when understand that this is not only the job of the Project Manager, considered within the context of the construction industry. Even Engineer, Architect or Quantity Surveyor. Quality is everybody’s with an abundance of local talent and capable contractors, our business. Similarly, the same can be said of cost and time. Hence, governments have a history of turning to “foreign experts” for improvements in project performance may only arise if all involved advice, thereby resulting in underutilized resources at the local level. in the delivery process become quality, cost and time focused. If we are to weather this storm then expert opinion, implementable The Way Forward strategies, suitable management principles and reform plans applicable to the current construction climate must be sourced The road to a successful future and a vibrant construction from within the Caribbean region, simply because our future sector will not be an easy one. There is no doubt, however, that ultimately depends on us. Where then do we start? serious decisions need to be made soon if we are to reach our destination. To get there, we need to continue to allow international Implementation Issues companies to operate freely to some extent. At the same time our governments cannot continue to say that our domestic According to numerous stakeholders within the industry the sector supply of labor cannot meet the regional demand because the cannot survive on short-term projects to sustain their workforce quality and quantity of our work are considered unreliable. in the medium and long-term. When asked to identify solutions, a senior official at a leading consulting firm (architects and The crux of the issue is that with the increasing complexity and engineers) suggested that the region introduce small to medium uncertainty of the business world, practically all worthwhile plans infrastructure type projects to be implemented over the next and strategies necessitate substantial human, organizational and one to three years. Projects should focus on improving the road governmental change. Perhaps, the time is ripe for our leaders to network to facilitate the transportation demand, water supply to find a formula for integrating our local workforce with foreign ones. rural districts through the construction of small desalination plants On the other hand, governments should insist that contractors (1 million gallon tanks), educational facilities to better serve our develop workplace learning activities. A very real example might growing demand to provide for our younger generation. There be where a construction worker be taught to read and write so also must be eco-environment protection and eco-tourism policy that when the construction site closes down he may be able to because of our growing need to protect our environment. The perform another task or he may be better prepared to seek further Caribbean has been labeled as an eco-tourism destination. employment along the same lines. This will certainly work for those most expected to be affected by the redundancy stigma. The challenge, however, lies in the implementation of these projects without incurring the cost and time It is time that we have a vision about where we want to get Whatever your needs are in the area of valuation and real estate consulting, our professionals have the overruns we have accepted until now as the norm. to and then get everyone to come along with us on that eventful journey. Remember, politics is all about trying to knowledge and resources to provide you with fast, accurate, and objective solutions. With over 55 Solutions persuade others to come ‘round to your point of view. Perhaps offices nationwide, Integra Realty Resources is the largest valuation and counseling firm in the United it’s time we try getting the construction sector to be a part There are many reports about proposed cutbacks meant to deal with of the growth and developmental plans for our economies. States. the current crisis. Consequently, some estimate that a sizable portion Our biggest challenge, though, lies in the fact that the key • of the Caribbean’s construction workforce will become unemployed in the short term due to governments’ defensive strategy and lack to our future success lies in integration not separation. The services we provide are: of development initiative. This may be compounded by the fact that some governments are “inflexible” in that they have their own • Property Valuation • Valuation for Financial Reporting (VFR) political agenda and are only prepared to address recommendations • Market & Feasibility Studies • Eminent Domain made by favored international consultants, who in many instances do not understand our very different economies and cultures. Steve Rajpatty, MBA, MSc, MRICS, MAPM, • Due Diligence Studies • Portfolio Valuation MCIOB, FCMI, AACEM, AMAI, Where is our sense of national pride and Chartered Quantity Surveyor & Chartered Builder • Litigation Support • Specialty Property Valuation desire for employment sustainability? Chairman & CEO Associated Services (Caribbean) Ltd. If we are to continue depending on foreign labor and expertise Asltt.com in an effort to improve our construction methods then we must srajpatty@asltt.com Corporate Headquarters 30 Find extended articles, charts and more online ricsamericas.org/property-world 1133 Avenue of the Americas, 27th Floor, New York, NY 10036 (212) 255-7858 • www.irr.com RICS-PWFall09.indd 30-31 11/5/09 2:44 PM
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